India approves GST

India ratifies new Goods & Services Tax to boost growth

India’s Upper House, the Raiya Sabha, today (Wednesday 3 Aug) initiated the most important tax reform in the country’s modern history by passing the implementation Bill for a new Goods & Services Tax (GST). [Constitution (122nd Amendment) Bill, 2014].

However, the contentious issue of a rate for the new tax has yet to be agreed, but will possibly be 18%.

Indian GST is based on many of the key elements of Value Added Tax (VAT), applied in the European Union and over 100 other countries.

A ‘One Nation’ tax to propel Indian manufacturing and growth

The new consumption tax has been under discussion for over 15 years and aims to sweep away a whole range of opaque and cascading taxes which has curtailed growth. The impasse in negotiations was broken in 2014 when tax reform was made a central pillar of the current, reforming Prime Minister Modi's government.

GST promises to add up to 2% GDP growth per annum, and will help Indian businesses take on China in global markets. Manufacturing industries set to benefit most from the reform include: logistics; automobiles; and consumer goods. Some service sectors, including telecommunications, could lose out with higher rates; but there may be compensatory measures.

The final breakthrough for the new tax came when key concessions on rates and state compensation where made this week by the ruling BJP party to the opposition Congress party.

GST seeps away multitude of congestive taxes

India currently has a vast range of indirect takes, including: VAT, CENVAT, levies, Service Tax and Professional Tax. Complying with them places a suffocating burden on companies, and results in taxes on taxes for goods moved across the country. This compounding of the fiscal charge has deterred the development of a strong manufacturing base, and held back India on the global stage.

GST based on global tax standards

Some of the major features of Indian GST include:

Based on OECD and EU recommended principles

It helps create the world’s largest ‘single market’

It is charged on the final consumer at the location (State) of consumption - the destination concept

It reduces fraud by charging GST throughout the production chain, although businesses can recover it via their returns to ensure no costs to them

Like Canada, the regime has two levels: Center (CGST) and State (SGST) which are combined as Integrated GST (IGST)

Over 7 million business have to register, charge and file monthly GST returns

There is a GST registration threshold of INR 9 lakhs

It is levied on most goods and services

There are exemptions or reductions for key services, including: basic foodstuffs: public services: healthcare: education; and financial services

Implementation in 2017 or 2018

Whilst the approval of the Raiya Sabha is the major requirement for final roll out of GST, there still remain some contentious issues. Notably the setting of a standard GST rate. Congress will attempt to hold it at 18% or lower for its continued support.

The law returns to the Lower House for confirmation of the last minute concessions, and will require ratification by many states. But this should be relatively straightforward, and an implementation by 2017 or 2018 is likely.

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Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.